Agora Financial’s Rude Awakening

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Laguna Beach, California

• Markets resume the selloff as bailout plan is questioned,
• Gold rallies again as the enfeebled dollar slumps,
• How to stay long profits while short selling is banned and plenty more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

With all the commotion in the markets of late, your editor decided yesterday to take a walk and clear his head a little. After sending off Monday’s column, we took a stroll along the golden shores of the Arabian Gulf. The sun, now low in the sky, cast its amber hue over the lapping waves while a few young boys kicked a soccer ball across the sand.

The weather really only permits a few hours when such a leisurely saunter is practical here. A couple of hours earlier and you would simply collapse on account of the stifling temperature, routinely in the 120s. But just before sunset, the cooling evening breeze meets the dunes as they slope down into the water, both warm after a day in the blistering desert heat. The air becomes lighter, bearable and, eventually, comfortable.

Veering off the beach path and onto the esplanade, your editor came to one of the trendier restaurants in his little neighborhood. The place is popular with westerners who come over from Britain and Australia, largely to populate the media industry and manage construction projects.

Parched from our evening stroll and in need of a refreshing drink, we walked inside.

“I’m sorry, but you can’t come in here, ” said a stout man on the front desk. “We have a strict dress code.”

The man pointed to our legs, naked from the knees down. “No shorts,” he announced in a gruff voice.

“No shorts? Oh, we don’t want to eat…only to have a drink at the bar.”

“Well, I’m sorry. Those are the rules.”

“When did the ‘no shorts’ rule come in?” we persisted. “We’ve taken many a drink at the bar in shorts before.”

The man stood, arms folded and shaking his head.

“But it’s the middle of summer in the desert. Anyone with half a brain is wearing shorts.”

“New rules,” the disgruntled man repeated, himself in long black slacks and with sweat on his brow. “No shorts. Now you have to wear long pants and order food too.”

“So either go long or go home?”

“That’s the idea,” he said.

Long only in the desert, we thought to ourselves on the walk back. Have these people gone mad?

Whether at a beachside restaurant in the Middle East or braving the sizzling temperatures of the financial market, your editor prefers, at the very least, the option of going short. If, however, confronted with some utterly illogical ruling that forces us to go long only, we are more inclined to go long those things which remain inversely correlated to that which we wish to short.

Being long gold, for example, is one way to short the U.S. dollar. And drinking at home with friends is one way to short restaurants with stuffy dress codes.

Following is an interview Eric Fry recently gave an influential French finance magazine. In it he details a few ways you can go long profits while still staying short risk…even as the temperature in the financial market soars. Read on below for details…

—- Gold’s Discount Window Is Closing —-

With Gold Marching Back Over $900, it’s no wonder everyone’s talking about it again.

But what they don’t know about are “Vancouver LEAPERS”

The last time we saw a gold market like this, some investors made 971%, 2,464% and even 3,987% with little-known “LEAPER” stocks.

Today, you have a once-in-a-lifetime chance at similar gains for as little as $500… Details Here

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To France with Love
By Eric J. Fry

What are my “big investment ideas,” you ask? I’ll give you three: Sell the dollar, sell the dollar and sell the dollar. My fourth and fifth big investment ideas are related: Sell short long-dated U.S. Treasury bonds; buy commodities.

Sometimes the art of investing is like that kid’s game, “hide and seek.” A lot of the time you’re just trying to find a really good hiding place. But then every once in a while, you’re the one who’s looking around trying to find the other players.

During the last couple of years, I have been very afraid of the stock market, and in particular I have been afraid of the financial sector. So in many, many editions of the Rude Awakening, we’ve been telling our readers just to hide as well as they can. Mostly we have been telling them to hide out in commodities like gold and oil, and also to hide out in investments that are denominated in any currency other than the US dollar. For the most part, these have been very good hiding places. But lately, these hiding places are starting to feel a bit like tombs. The commodity markets have been horrible.

Stocks and commodities usually move in opposite directions. But during the recent stock market selloff of late August and early September, commodities provided almost no protection whatsoever. In fact, they performed even worse than stocks.

Therefore, many of us resource investors are feeling more chagrin than satisfaction. We sidestepped the financial sector 18-wheeler, only to step in front of the commodity sector bus. But at least we’re still flinching on the pavement…unlike our bank-stock-investing counterparts. We should remember that Merrill Lynch stock has delivered a total return of MINUS 45% during the last 10 years! Commodity prices have nearly doubled over the same timeframe. So all of us commodity investor who gravitate toward self-flagellation might want swing the whip a little more gently. These are very unusual times in the financial markets.

Even though commodity prices have retreated substantially from their all-time highs, they will rebound eventually…and then continue on to new all-time highs. (Perhaps the big bounce in gold and oil during the last couple of trading sessions is the start of something bigger). So at the risk of repeating myself, I will repeat myself anyway: I like commodities, at least for the long haul, if not also for the short haul. I like commodities because supplies are limited and demand is not. I also like commodities because they lack CEOs and executive management teams. I like commodities because greed and stupidity cannot destroy their value.

Please understand that my opinions are just that, mere opinions. I’m not issuing any prophecies here, just a couple of guesses. And even my guesses aren’t really guesses at all; they are reactions to fear. I am afraid that the US Federal Reserve and the U.S. Treasury have overextended themselves. They have committed hundreds of billions of dollars to rescuing Bear Stearns, Fannie Mae, Freddie Mac and AIG etc. That’s bad enough.

What’s worse is that these governmental agencies have exposed themselves to more than $1 trillion of potential liabilities. No one knows how large the ultimate invoice will be to clean up the American financial system. But we investors can assume that much of the money to satisfy that invoice will roll off of printing presses. We can assume, in other words, that the Treasury will greatly inflate the money supply in order to prevent an even more extreme credit crisis. This process will almost certainly erode the dollar’s value.

And so we ask ourselves, “What wins when the dollar loses?” Gold, the currency of the ages, comes to mind immediately. But we would also expect most other commodities to perform extremely well in a weak-dollar environment. And obviously, investments that are denominated in a foreign currency should perform relatively well when the dollar weakens, at least from the perspective of an American investor.

Also, we should expect the Treasury’s multi-billion-dollar bailout packages to increase the supply of Treasury bonds. I’m not so sure these bonds will meet with eager investment demand. For one thing, whenever supply swamps demand, prices fall. That’s economics 101. For another thing, the traditional buyers of Treasury bonds might become much less eager to loan money to a government that is buried under a massive mound of unknown and growing liabilities. So I’m afraid the road in front of us will be very difficult for investors in American stocks and bonds.

Investors who wish to bet on falling Treasury bond prices could buy an ETF like the UltraShort Lehman 20+ Year Treasury ProShares. (Symbol TBT. Price $68.37) This unique ETF wins when Treasury bond prices fall. Specifically, this ETF produces an investment result that corresponds to 200% of the inverse of the daily performance of the Lehman Brothers 20+ Year Treasury Index.

I think we’ve reached an important inflexion point in the American financial markets. The extinction of Bear Stearns, Lehman Bros., Fannie Mae and Freddie Mac – along with the near-death experiences of AIG, Merrill Lynch, Morgan Stanley and Goldman Sachs – tell us that a very important change has occurred in the financial markets. The extreme greed and institutionalized speculation that has nourished the Wall Street brokerage firms for so many years has finally been exposed as the fraud it has always been.

American-style investment banking is not a “business model,” it is a Ponzi scheme – a fraud – in which all the money flows to the people at the top, while everyone else who plays the game absorbs the losses. This massive institutionalized fraud is now over.

But investors must understand that this fraud created enormous leverage in the financial system. And this enormous leverage created enormous liquidity which caused stock prices all around the world to soar… and therefore, caused lots of investors to feel rich and happy. But now that all of this leverage is collapsing, the liquidity it created is draining from the financial system and causing share prices to fall sharply. The U.S. Treasury and the Federal Reserve are trying very hard to counteract these trends by absorbing hundreds of billions of dollars worth of bad mortgages, and also pumping fresh credit into the banking system.

The Treasury and the Federal hope that these actions will restore buoyancy to the potential markets. But we doubt it. Instead, we suspect that these actions will only add buoyancy to the US inflation rate and, therefore, to commodity prices.

Most of the bad guys who created this mess are gone…although not yet in prison where they belong. And most of the American regulatory agencies are eager to change the rules of the game. These two developments are very helpful. But the process of repairing and reforming the American financial system could be painful. The U.S. Treasury will absolutely, positively increase the money supply to rescue the financial system…Which means investors must try to protect themselves against an almost certain inflation.

So what’s an investor to do?

Sell America stocks, bonds and currencies; buy foreign stocks, bonds and currencies. And, of course, buy commodities.

Good Luck!

— Protect Your Wealth With Gold —

From Hulbert’s No 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet…

GOLD $2,000

“I’m so sure gold will soar higher I’ll even make you a guarantee… plus, I’ll give you five entirely new ways to play the trend…”

“Including one hidden way to snap up gold… for less than one penny per ounce…”

How can that be possible?

Give me the next four minutes and I’ll show you how… Continued Here

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[Rude Endnote: While your editor was busy arguing with irrational doormen here in Dubai yesterday, our friend and colleague, Dan Denning, who heads up the Australian Daily Reckoning, was actually doing his job. Here, in lieu of our own endnote, we present some thoughts from the ever-astute Mr. Denning:

“Well that didn’t work out at all. Investors had a full weekend to think about the details of the worldwide plan to save markets. And then they became terrified. They sold shares and bought commodities.

“It shouldn’t be that surprising. And perhaps it wasn’t terror. Maybe it was just plain old common sense. You can’t short stocks anymore in some places. But you can buy commodities! With the global supply of dollars on the verge of a huge increase, investors declared for gold and oil yesterday.

“The Dow lost 372 points in New York to close just above 11,000. The S&P 500 shed an impressive 3.8%–nearly half its gains from the last two giddy days. So it turns out the ban on short selling in the financials doesn’t keep stocks from falling. It just reminds investors there are some very good reasons for selling.

“Meanwhile, the Reuters/Jeffries CRB commodity index posted its biggest one-day gain since 1956…

“This confirms our basic thesis that ‘stuff’ is currently a much better bet than ‘paper.’”

Thanks Dan. The next beer at our trendy neighborhood bar is on us…just remember to bring your shorts.

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com